Highwoods Properties Inc (HIW) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties third quarter 2009 conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over the Tabitha Zane. Please go ahead, ma'am.

Thank you. Good morning, everybody. On the call today are Ed Fritsch, President and Chief Executive Officer, Terry Stevens, Chief Financial Officer, and Mike Harris, Chief Operating Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com or call 919-431-1529 and we will e-mail copies to you. Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financing, joint ventures, rollover rents, occupancy, revenue trends, and so forth.

Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors including those identified at the bottom of yesterday's release and those identified in the Company's annual report on Form 10-K for the year ended December 31, 2008, and subsequent reports filed with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

During this call we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management's view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday's release and are also available on the Investor Relations section of the web at Highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning. Thank you for joining us today. It remains a tough economic environment with some signs of optimism. Many experts predict the timing and magnitude of the recovery using various shapes V, U, W, Nike Swoosh, or the dreaded L shape. Regardless of what shape it takes, we look at the current recession and the path to recovery for businesses in four stages somewhat akin to Glenn Mueller's view of market cycles. Stage one was fear and uncertainty, businesses were paralyzed. Stage two, where we believe the market is today, is wait and see with a dose of confidence while businesses see what they believe is light at the end of the tunnel, they remain cautious and hunkered down, i.e. renewals continue to dominate the day. Stage three is guarded optimism, in the early stage of a growth cycle businesses will be emerging from the tunnel. However, at first we expect absorption to be relatively invisible due to the current underutilization of space. Stage four is sustained confidence. Businesses will be expanding, and we would expect to return to sustained positive net absorption.

As I mentioned, we believe most businesses are in stage two. Fear has been replaced by a sense of patience and some confidence. On our end this is evidenced by a significant slowdown in request for rent relief and an increase in showings. Much of this activity appears to be a mixed bag of tire kickers and real prospects and only time will tell how much of this activity materializes into signed deals. When a greater percentage of this activity translates into signed deals we'll believe businesses are transitioning from stage two to stage three.

Stage three, landlords may not initially realize the full benefit of an improving economy. This recession drove many companies to reduce headcount without a corresponding contraction in space. What we and every landlord need to be cognizant of is the current underutilization of space.

As the economy improves and businesses begin to add people, they will first absorb space that they already lease but under occupy. As underutilized space is absorbed, we'll move to stage four which is business expansion and a return to stabilized occupancy levels aided by a lack of new construction. The obvious question is how long and how smoothly will businesses transition -- before businesses transition to stage three, the early phase of the growth cycle. We expect to begin to see more positive signs of growth in the latter part of 2010 or early 2011 and sustained economic growth beginning in 2012 with some choppiness along the way.

Shifting to our third quarter results, we are benefiting from a higher quality portfolio, concentrated in better submarkets, a healthy balance sheet and strong relationships with the brokerage community. In every market except the Triad our office occupancy is significantly better than the market as a whole. We have a competitive advantage by proactively offering to escrow TI's and leasing commissions providing upfront assurance to the customer and the broker that the buildout and the commission will be fully funded. Within our portfolio, $75 million of development projects were placed in service during the quarter. They included the GSA build to suit in Jackson, Mississippi, and two office properties in Raleigh, CentreGreen Five and GlenLake Six. These projects were, on average, 83% pre leased on a dollar weighted basis.

Our $69 million wholly owned development pipeline now consists of two office properties encompassing 301,000 square feet and one 200,000 square foot industrial property. Combined, these properties are 45% pre leased with stabilization dates of 2010 and 2011. With the exception of one small 72,000 square foot project that is 54% pre leased started by a local developer in Raleigh, no new spec development commenced in any of our markets and we don't see this trend reversing any time soon. We are pursuing a few build to suit opportunities with projected double-digit yields. We don't know if we'll win any of them but they are real projects with high quality companies. Our reputation as a proven developer and our ability to deliver these projects without any financing contingencies should provide us with a competitive advantage.

On the disposition front year to date we have sold $69 million of noncore assets. Through year end we expect to sell up to approximately $15 million of additional noncore properties. The combined cap rate on our approximate $85 million of 2009 dispositions, including projected fourth quarter sales, is expected to be in the high 8's.

With regard to acquisitions we like our competitive position. We are blending our active pursuit of opportunities with a strong balance sheet, conservative underwriting, market knowledge, and patience. We are routinely refining our division by division wish list and maintaining open conversations with brokers, bankers and owners.

Let me assure you while we're actively seeking acquisitions and development opportunities that meet our strict criteria, our primary focus is on leasing space. Our division heads and leasing agents are making warm and cold calls. Mike and I are assisting wherever possible. As always, we appreciate and applaud our team's hard work, the active involvement of our Board, and the loyalty of our shareholders. Mike.

Thanks, Ed. Good morning, everyone. To further comment on what Ed just said, leasing is our number one priority and we're hitting it hard in all of our markets. Activity was decent in the third quarter with 130 leases signed for 913,000 square feet of first and second generation space, 74% of which was office space. This compares to 972,000 square feet leased in the same quarter a year ago. Occupancy in our wholly owned portfolio declined 20 basis points from the second quarter to 87.8% due to the placement of the three properties placed in service that Ed discussed earlier. The average term for office leases signed this quarter was 3.8 years, slightly better than 3.6 years in the second quarter. Average in-place cash rental rates across our total portfolio rose 3.6% from a year ago. In our office portfolio they were up 2.9%. Cash rent growth for office leases signed this quarter declined 5.7% while GAAP rents on offices leases signed increased 3.4%. In our portfolio, CapEx related to office leasing was $8.74 per square foot in the third quarter, right in line with our five quarter average. As Ed mentioned, our ability to escrow TI's and leasing commissions is very meaningful in the marketplace and we are not shy about touting that to customers, prospects, and brokers. All markets are continuing to feel some pain as customers maintain the upper hand.

We're pleased that three of our top five office markets, Richmond, Nashville, and Raleigh, reported positive net absorption in the third quarter and our office occupancy in all of our markets, except the Triad, continues to perform -- outperform overall market occupancy. According to the Bureau of Labor Statistics, eight of our ten markets also reported positive office job growth in the third quarter. On balance, our most stable markets are Nashville and Memphis with occupancy in our wholly owned portfolio at 93.8% and 91.6% respectively. In Nashville the healthcare industry remains a solid economic anchor and the West End and Brentwood submarkets where approximately 55% of our portfolio is located had the highest occupancy in the area. The Cool Springs submarket is currently experiencing higher vacancy because of overbuilding but remains a highly sought after location as evidenced by the 91,000 square foot first generation lease we signed there in August. While the submarket's occupancy is 89.5%, our 934,000 square feet in Cool Springs is 92% leased. The Poplar corridor and 385 submarkets in Memphis are holding their own and the lack of new supply over the past three years has certainly helped. We have some good prospects taking a hard look at Triad Centre III which will be delivered in the fourth quarter and is scheduled to reach stabilization in the second quarter of 2011.

In Raleigh we are seeing increased activity, including potential corporate relocations and business expansions. We inked 25 deals totaling 152,000 square feet and eight of these leases or 42% of square feet leased were with new customers. One of these included a 35,000 square foot lease with a subsidiary of a major international financial services firm moving to Raleigh. This leasing activity also included 19,000 square feet of first-generation space.

Atlanta remains a tale of two cities. The weakest submarkets are Buckhead, downtown and Midtown where we fortunately don't own anything. Even with very aggressive concessions, the net effective rents in these submarkets are generally not compelling enough to lure customers from our submarkets where activity is decent and our office assets are 90.8% occupied.

Even though Florida continues to suffer from the collapse of the housing industry and overbuilding in certain submarkets, our wholly owned portfolios in Orlando and Tampa are holding up well with occupancy at 98.7% and 90.7% respectively.

Richmond also continues to perform well with occupancy in our wholly owned portfolio increasing 40 basis points to 92.4% from the second quarter.

I'd like to touch briefly on our Kansas City retail. While occupancy has held up well, 92.6% at quarter end, we are feeling the effects of lower sales on percentage rents, higher bad debts, lower NOI from rent relief granted earlier in the year. On the leasing front, we signed a 27,000 square foot lease with Forever 21 during the quarter and the Plaza continues to be a very desirable location for retailers.

While there are reasons to be somewhat optimistic, leasing remains a slug fest and we don't see conditions materially improving. We're definitely getting more than our fair share of the deals that are out there, a testament to the hard work of our division heads and leasing agents, our strong balance sheet and our solid reputation as a quality landlord. Terry.

Thanks, Mike. We are pleased with our financial results for the third quarter with FFO of $46.4 million or $0.62 per share. This quarter's solid FFO performance was also positively impacted by $0.02 from a gain on debt extinguishment and the favorable cash settlement of a real estate related legal claim and negatively impacted by $0.01 of impairments on certain wholly owned and joint venture depreciable assets that were reclassified to discontinued operations. Core FFO, which we define to exclude lease termination fees, land and condo gains, gains or losses on debt extinguishments and other unusual items was $0.60 per share for the quarter. For the nine months of 2009, total FFO was $143.3 million, or $2.02 per share, which compares to $130.3 million or $2.10 per share for the first nine months of 2008. The reduction in FFO per share for the third quarter and the nine months is mostly due to dilution from the planned de-leveraging and liquidity enhancing transactions, equity raises in September 2008 and May 2009 totaling $339 million, over $80 million in property dispositions during the last 10 months, and $182 million from new unsecured and secured loans in 2009. Average shares outstanding were 75.1 million in the third quarter 2009 versus just 63.2 million shares in the third quarter 2008. In addition, the nine months last year included $0.07 in land gains and term fees compared to only $0.02 for the nine months this year.

Total revenues from continuing operations were up $1.5 million this quarter, or 1.3% compared to the third quarter of last year. Revenues from same properties, those in service during both periods, were down 2.7%, mostly due to the reduction in average occupancy this quarter versus third quarter last year. Excluding straight line rental income and term fee income, same-property revenues were down by 1.7%. In addition, revenues for the first nine months of 2009 were impacted by $1.9 million in higher bad debt expense on both billed and straight line rent receivables compared to last year. Bad debt expenses were basically the same for the third quarter versus last year. Revenues from non-same properties were up $4.2 million quarter over quarter and up $13 million for the nine months from new development projects and the fourth quarter 2008 PennMarc acquisition in Memphis.

Total cash NOI from all continuing operations, which is NOI excluding straight line rents and lease term fees, was up 1.8% in the third quarter 2009 compared to the third quarter last year due to the positive impact from new development NOI partly offset by a 3.2% decline in same property cash NOI. The 3.2% would have been only 2.3% if the impact from customers in Raleigh who moved out of our same property portfolio to our RBC Plaza, which is not yet in the same property pool, were excluded. On a combined same property and non-same property basis, those customers grew 78% in terms of square feet leased and 102% in annualized revenue. Same property cash NOI was also impacted by a 1.2% increase in operating costs this quarter, mostly utilities.

G&A for the quarter was approximately $0.6 million higher than third quarter 2008. The increase was caused by a $1.4 million increase in deferred compensation liabilities, but this is fully offset by a corresponding increase in other income. As we have discussed before, the Company is, in effect, fully hedged on its deferred comp liabilities but the offsetting impacts flow through two separate line items on the income statement as required by GAAP. Excluding this $1.4 million non-FFO item, G&A was down $800,000 primarily from lower salaries and fringe benefit costs from recent headcount reductions and lower dead deal costs partly offset by lower capitalized overhead. For the nine months G&A was lower by $2.1 million, or 7%. The decrease was caused by $2 million in lower dead deal costs, $4 million in lower salaries, benefits, and incentive compensation offset by $2.1 million in higher non-FFO deferred compensation expense I just referred to.

Net interest expense this quarter was down $3.2 million compared to last year due to lower average debt balances from paying down debt with proceeds raised in our common stock offerings and our property dispositions and from a 21 basis point reduction in quarter over quarter average interest rates on our debt. These reductions were partly offset by $950,000 in lower capitalized interest.

Preferred dividends were lower by $800,000 this quarter compared to last year as a result of our retirement of nearly $54 million of preferred stock last September. The favorable impact on total FFO per share from the reductions in interest expense and preferred dividends was offset by the higher number of common shares outstanding this quarter from the common stock offerings last September and this May. In August, we closed a $115 million 6-1/2 year secured loan bearing interest at 6.88% and a $47.3 million seven-year secured loan bearing interest at 7.5%. Proceeds from these two loans were used to pay off all outstanding borrowings on our $450 million line of credit which remains currently undrawn and the remaining loan proceeds were held as cash. Total cash on hand at quarter end, including cash held with a 1031 intermediary, was $54 million. We recently paid off the $780,000 construction loan relating to the RBC Plaza condos. So we have no maturities for the rest of 2009, no debt maturities in 2010, and only $137 million maturing in 2011. This assumes we exercise our unilateral right to extend our secured construction facility from 2010 to 2012.

We have kicked off the syndication of a new unsecured credit facility which we expect to close in the next few months. We expect the new facility to carry market terms with LIBOR spread and credit -- and facility fee combined likely to be in the mid 300s compared to 100 bps in our current facility. Given our cash balances and reduced development pipeline, we are proactively targeting a smaller facility than when we up-sized our last facility from $250 million to $450 million back in 2006. We are targeting a new facility in the $350 million range plus an accordion feature.

Finally, we raised the upper end and narrowed the range of our full-year 2009 FFO guidance to $2.59 to $2.62 per share from $2.52 to $2.60 per share. This improvement is due to better than expected third quarter core results and the net $0.01 positive impact from gain on debt extinguishment, settlement of the legal claim and the impairments on depreciable assets.

Operator, we're now ready for questions.

(Operator Instructions) Our first question comes from the line of John Stewart with Green Street Advisors. Please proceed.

Thank you. Ed, I was hoping you could give us a bit of color in terms of your comments on pursuing both acquisitions and development. It sounds like obviously you're primarily targeting build to suits, and I realize that you also referenced a wish list of properties that you'd like to have, but can you give us a sense in terms of what you're targeting, both products, markets, and yields?

Sure, John. With regard to acquisitions, that's what ties to our wish list. We've described that each of our divisions has a wish list of those assets which we don't own today that we believe to be A, A minus assets in A locations that we would like to own should they become available. And some of them the probability is low while others we think that there's significant chance that we may be able to buy them.

On a development perspective, we're looking at solely build to suits and what I was referencing is our response to RFPs that have come to market for build to suits. With regard to the allocation, I would anticipate that we would spend or invest a significant disproportionate of those dollars that we have available towards acquisitions as opposed to build to suit opportunities.

With regard to returns, we would think that both the developments and the acquisitions would have a stabilized year one cash return of 10 plus percent.

That's helpful, thank you. I guess one thing that kind of jumped out at me was the roll-down on the industrial portfolio. Can you speak to that?

It's primarily Greensboro where we've suffered the occupancy drop. Atlanta has held its own, but in Greensboro we have two product classes. One such as Enterprise and Airpark South are more recent developments and of higher quality, and then we have some older that remains in the portfolio that as we said we've tried to exit some of that. That's what suffers. So our Greensboro industrial occupancy is 79.1%, and if we didn't have the Greensboro industrial, in fact, our overall portfolio occupancy would be 89%.

But it looks like the rents signed on industrial leases in Atlanta rolled down quite a bit during the quarter as well.

They did. Mostly attributed to two deals, but there wasn't a tremendous amount of square footage leased in the industrial. I think it was like 75,000 square feet total but, yes, it did roll down.

I guess the bigger picture question is your thoughts in terms of the industrial portfolio going forward.

I think that we have some land positions that we would like to continue to develop out both in Greensboro and Atlanta. I think that as the Company moves forward, the percent of revenues that come from industrial will continue to contract.

Okay. And then just lastly, if you could touch on Raleigh again. It seems surprising, particularly hearing Mike's comments, sounds like you've got good activity but what you're seeing in the same-store results seems to tell a different story.

A few things going on here, John. One is that we moved three customers from existing space into RBC Plaza. And, as Mike referenced, their total square footage consumed increased by 78% and their annualized revenues increased by over 100%, so we grew them dramatically on both a footprint and a revenue perspective. Second is that there were a couple of deals that we did in Raleigh this quarter that had a significant component of free rent. One of those deals was we attracted a customer that we haven't yet done a press release on but we were able to -- it's pure new absorption into the market. It's right at 35,000 square feet. And the competition was pretty stiff as it was a widely broadcasted RFP and we had to do some things in order to be able to get it in our building. I don't think we were the cheapest option but we certainly had a significant component of free rent. If you net the few deals we did in Raleigh out of the concession number on page 13, that $0.59 goes to $0.37 so it was all isolated in those few deals in Raleigh.

The third thing that I'd like to staple onto this already long answer is it's interesting that Raleigh now, and I have no idea whether these will materialize or not, but a lot of money and elbow grease has been invested both by us and some of our peer competitors here in this market as there have been two unidentified prospects that have come in, one looking for 100 to grow to 200 and the other looking for a 300,000 square foot build to suit. Both of them are looking at multi markets so we may end up just being a stocking horse for their existing landlord. We may end up getting either or both deals, but they're multimarket, multi-landlord lookers, so I just add that on because it's interesting to know of a half a million square feet that's out in the market looking that would be pure positive net absorption.

Did you say what types of tenants those are?

We don't know, John. We're led to believe that one is -- the smaller one, the one that's initially going to come in at about 100 to 125 and grow to 200 is financial services. The other one we don't know at all what industry they're in other than we've been told that they're a Fortune 500 Company. Everything else -- excuse me?

That's very helpful. Thanks a lot.

Our next question comes from the line of Brendan Maiorana from Wells Fargo.

Good morning. Thanks. Just following up, Ed. On the build to suit opportunities, is the -- I'm just trying to understand where a user would want to build to suit given where construction costs are today and the returns that developers are requiring today relative to where market rents are. Are these just specialized properties? Is it government-related tenants primarily? Just given the amount of space that's out there, it seems like it'd be a much cheaper option to look for existing spaces out of the ground already.

Actually, Brendan, it's all of. Some of it is somewhat unique. As you know, the government has very unique security requirements and engineering requirements affiliated with any development they go into. There is a lot of discussion with regard to GSA right now with regard to a shift back towards evaluating existing space, but in order to do that there's going to have to be some compromise on their requirements for security aspects.

The other prospects, as I mentioned in my response to John Stewart, we don't know what it is, but it's in the 300,000 to 350,000 square feet. So not knowing the industry or who it is or where they're even coming from and that's the way it's been presented by the third parties brokers, I can't give you much color on it. The other few that we are chasing are entities that are looking for space that would specifically fulfill their need because they have certain requirements with regard to consolidations or a data center or their existing space have some form of functional obsolescence. From there, that pretty much covers the spectrum.

Short of renewing where they are, if you look at a 300,000 square footer, there are just not many markets that would have that big a block of space to go into in terms of existing product, and talk about construction costs. We believe construction costs are down pretty significantly from where we saw highs hitting about two years ago so it's not as expensive to build today, it is offset of course by the yield that we and others would require to take the risk to do this.

That's helpful, thank you. Then with respect to your existing pipeline that's out of the ground and some of the recently completed projects that you have in the vacancy that's there, are you guys being more aggressive in terms of the rent that you're offering or are you holding the line on rent and maybe pushing out expectations in terms of the lease-up and timing?

Our division heads have coached their marketing representatives and we've coached the division heads to bring all deals, let's talk about it and let's understand the credit, the viability of the customer, their propensity to renew after the initial term, how specialized would the buildout be. But our development pipeline continues to draw a 9 plus first year stabilized cash return. So we're looking at any lookers, but as we've mentioned in previous scripts, the number of prospects for first generation space is dramatically less than what it has been in prior years.

Understood. That's helpful. Thanks. And then Mike you talked about using your TI dollars to attract tenants, and now you have a competitive advantage relative to your private marquee competitors, but as I look at the TI dollars over the past few quarters, it seems like they are holding relatively steady. Compare that to rent concessions which seem to tick up a little bit. So do you feel that your TI dollar, spending those dollars is bearing fruit in terms of attracting tenants your way?

Brendan this is Ed. I just wanted to say one thing, then give to the Mike. A clarification is what we're trying to convey is -- and it is not just versus our private competitors -- is that we're offering to escrow up front at time of LOI or time of lease execution the dollars for TI's and commissions so that we can provide our customers and the brokers with an assurance that those dollars will be there. So it's not so much we're out trying to buy occupancy. What we're out trying to do is give a level of comfort that the broker will get paid and that the general contractors and his subs will get paid so the customer can move in as promised given that the dollars are there and we're seeing some of our competitors are having trouble funding TI's and funding the second half of the commission. In fact, we've seen one deal where the customer required a security deposit from the landlord and we overcame that in advance by on an unsolicited basis offering to escrow the full amount of the TI's and the commissions because that doesn't cost us anything. We already have cash sitting in the bank that we just move and escrow for the particular buildout. So I just want to bifurcate the two issues. One is the availability of the funds. We're making it known that we as a landlord can differentiate ourselves from some of the competition by putting that money aside up front.

I think, Brendan, the first-generation space is where it really can become a differentiator because those are typically more expensive to begin with. Just an example, the large transaction we did in Nashville that we did back in August, which was a 91,000 square footer, we believe that was a big differentiating factor as our ability to put that up front and we think our competition, quite frankly, just couldn't do it. And at the end of the day, it made the tenant a little bit nervous about them and more comfortable with us, so, yes, that's what we're really alluding to.

Very helpful for the clarification. Thanks. And in terms -- have there been any changes in terms of lease structures with the amount of either at the magnitude of annual escalations or the frequency of annual escalations or any change in sort of underlying leasing economics that have occurred over the past three to six months?

Not really, Brendan. We've been holding our own with anywhere from 2% to 3.5% depending on the market and submarket and our guys have been very good at holding the line on that.

Thank you.

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed.

Thank you very much. Ed, I want to go back to your comments at the beginning of the call. You seem pretty cautious. I guess what we're trying to figure out here is do you think that most of the layoffs from your tenants or just in your markets in general have already occurred or do you think there's more to come?

Our view is that most of that has occurred and I don't think it is just isolated to our markets. When you look at the transcripts and the earnings releases from virtually any company from those that have hundreds of thousands of employees to those that have 20 employees there's been headcount reductions in virtually every sector. So what I was referencing was that these layoffs have occurred and those who are still financially viable and didn't have lease expirations or haven't tried to do some change in their lease are likely to have some amount of unutilized space within their portfolio that would be absorbed before they would need to call the landlord and inquire about moving a demising wall. The Bureau of Labor Statistics supports that and, in fact, Jamie, when we look at the Bureau of Labor Statistics just third quarter over second quarter, eight of our ten markets had positive change in office job growth.

Okay. So when you think about the, I guess the excess space either in both your portfolio and the market in general, how much would you say that is on a percentage basis?

I think that's a tough call. In the past -- if you remember a couple of downturns ago there was a lot of conversation about vacancy and then let's add what's available to subleased space to the vacancy and then let's add to that the shadow space that's not being put on the market for sublease that basically was over-consumed mostly by technology companies, and it was hard to get your arms around that but we tried because it was a floor here or half a floor there that was dark. I think this is where you go down a row of cubes and the 6th and the 13th one is vacant and you walk down a list of offices and the 7th and the 21st one is vacant. My guess, it's somewhere, a meaningful few percentage points that would be available for absorption before a company would need to go to the market.

Okay. And then are there certain markets where that's more prevalent?

Yes, I think so. Those markets that were more hit by industries that occupied office to support the housing such as title insurance, mortgage services, back office for some financial institutions. I think that those markets have suffered a little bit more in the way of layoffs.

There's been a lot touted, Jamie, about Richmond for example, because the big blocks of space out in west Richmond, but those are with Circuit City and LandAmerica filing bankruptcy back earlier in the year, those are more single tenant buildings that are not part of what we consider a competitive subset so big blocks of space and not as relevant to our typical customer which is in the 5,000 to 7,000 square foot range. These type of properties have yet to even been look at for becoming multi-tenant adapted.

Okay. And then, I mean, you talked about markets kind of stabilizing late 2010, even early 2011. Do you guys have a view on where you think your portfolio occupancy might hit bottom?

We don't but we're working on refining 2010 budgets now and we'll get a better sense for that as we work through that, then we'll include that when we put out guidance at the first of the year.

Okay. And then finally, Terry, I noticed the assumption underlying your new guidance, the midpoint of the same-store growth was increased. What were the drivers of that? Do you have an improved outlook on operations or is it more on the expense side?

Jamie, just to clarify, that was not same-store NOI, it was total cash NOI. So that includes development kicking in as well. So that's the total amount of NOI coming through. We raised it for the full year just given where we were through the first nine months of the year. So same-store NOI is negative because we have had a drop in occupancy. I will say same-store NOI probably will maybe look a little better in the fourth quarter this year given how much expenses had gone up last year. We're up against sort of a tougher comp, and I think we're going to show well when we get to the fourth quarter, but even with that, same-store NOI will be down this year compared to 2008 just given the drop in average occupancy that we've had this year. So just to clarify, that wasn't a same store in our guidance so much as it was just total cash NOI, both new development and same store.

Thank you very much.

Our next question comes from the line of Chris Lucas with Robert W. Baird. Please proceed.

Good morning, guys.

Hey, Chris.

Just a couple of follow-up questions here. Ed, just on the leasing environment, you mentioned you weren't getting the push-back on rent relief but in terms of renewals or even new leasing that's being done, are you seeing an interest in shorter or longer terms than, say, three to six months ago?

Yes, you're not going to like this answer because it's so different from customer to customer. It depends on where they are in their thinking and where they are with regard to their current expiration date. Some are beginning to think maybe I ought to go ahead and get a deal now before it's too late, before things start to -- the baton starts to go from my hand to the landlord's hand. So I've got a tenant rep broker telling me that I ought to go ahead and lock in now because there's never been a better time to lock in long term for my space. Others are just saying, I just need to be in a position where I can hunker down for the next 24 to 30 months and then see where this thing is going to go before I commit to anything. So it's really across the board. In Raleigh, we had -- I mentioned it in a response to, I think it was Brendan, about the activity there, and Raleigh was more than half the space that we leased was new deals and it was the longest terms that we got out of any markets that we're in, where the average term was over five years.

Okay.

Go ahead, sorry.

I was going to say, on the lease environment, the shadow vacancy and your comments about that, what's your sense about lease term fee income in terms of its trends, up or down over the next year in terms of what you think tenants are looking for?

Yes, Terry and I were talking about this last night and scratching our heads a little bit. If you look at the lease term fees versus this year to date, versus what it's been over the past several years it's down dramatically, and if you had asked us at the start of the year we would have thought that lease term fees would have moved up, but we're at about $1.4 million year to date and if you look at the last five or six years, we didn't have a year -- the average is probably closer to $3.5 million, $4 million. So it's a bit of an anomaly that we're in one of the toughest times we've been in and lease term fees are very nominal in comparison to the historic trend. So I'd be a little reticent to say that I would expect them to really step up going forward.

Then just to clarify what Mike and I said, Chris, on the -- where I said it was five years average term, Mike said it was seven, the five I was talking about is just second gen. It was interesting that in second gen relapse space that we did that we had 5.1 years which is better than any of the other markets that we're in.

Okay. Thanks. Terry, just on the capital markets you had mentioned on your renewal on the line, you're looking at market terms. Do market terms now include a floor on LIBOR or has that sort of moved away?

Chris, what we're hearing is while LIBOR floors were very prevalent back in the early part of the year, as the year has gone on, LIBOR floors are coming off for investment grade credits generally. We're not done with this deal yet, but our expectation and hope would be that there would be no LIBOR floor in our deal given that we are an investment grade credit.

Okay. That's very helpful. Just in terms of the quality of your credit right now, I recognize that you probably don't have proceed issues right now, but what kind of quotes are you getting on your unsecured debt at this point in terms of what a potential issuance would cost you?

I think the best comp, Chris, would be looking just at the one that ProLogis did this week. Their credit ratings are very similar to ours, I think they're maybe one notch higher but they have negative outlook which might get them close to our BBB minus range. Their big deal this week closed at around 7-3/8 coupon, so I think we would be in that mid-7 range right now on a new issue.

Okay, thanks, guys, appreciate it.

Thanks, Chris.

(Operator Instructions) Our next question comes from the line of John Guinee with Stifel. Please proceed.

Quick one. When you talk to people on the private side what they basically say is to move a tenant into your building requires what they refer to as a capital-neutral transaction for the tenant, turn-key TI's, moving allowance, space planning dollars, assuming existing lease obligations, and that almost the face rent is secondary if you can provide them better space at a capital-neutral transaction. Is that an accurate way to look at it?

I think that that comes into play in a number of deals, but I wouldn't say every deal. I think that the biggest factor on that, John, is where we do test fits where a customer may be in a competing space and due to inefficiencies in the floor plate or the way that they've grown into the space over time that they now occupy, let's say 20,000 square feet, for example purposes, and if we relocated them, we could lay them out in better efficiencies and a more efficient floor plate and put them in 17,000 square feet, that that would be -- that would have a material impact on the total cost to rent even though the rental rate may be marginally higher or there may be some other aspects of the transaction, but to be able to reduce the space by the 3,000 square feet out of 20,000 would be meaningful to the total cost.

I also think that when a customer moves from one building to another that there is a couple of other things on the margin that need to be looked at that are typically missed because there's FF&E expense that generally isn't picked up by the landlord in total and then there's also the optics of moving and what that says to your employee base. So we try to take that into consideration when we're evaluating renewals, and we also try to take it into consideration when we're trying to poach from our competitors in that the decision maker may have just in the last nine months told all of his workforce that they've eliminated the 401(k) match or reduced dramatically their support of employee healthcare or dependent healthcare, and then to take on a move that would have the optics of a spend is a difficult thing from a morale perspective.

Great. Okay. Next thing, I recall seeing some flyers out there in the marketplace for your Winston-Salem assets. Can you refresh our memory on what's for sale and what the status is on those?

Sure. We have in the market an offering memorandum for Madison Park which is approximately 470,000 square feet and also for Consolidated Center which is about 176,000 square feet. The buildings are listed with CB, and we're waiting for offers to come in. I think that folks from CB and some folks from our shop are going through what they have on a preliminary basis at this point. We have offered owner financing. It's a great opportunity for somebody who is looking for real estate if you happen to be on the phone.

Thanks a lot.

Thanks, John.

And there are no further questions.

Again, thanks, everybody, for your time and for your interest. If you have any further calls, as always, don't hesitate to give us a holler. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.